Jun 9, 2022
5 min read
Basic of Technical Analysis for Cryptocurrency
- In short, technical analysis is the art of studying the history of an asset’s price action to predict its future.
- When the price movement patterns repeat themselves, investors who spot them early can get an edge in their strategy development and get better-than-average returns. Even though the cryptocurrency market is relatively new, the patterns are already forming in short and medium-term time frames. The following sections give you basics on chart types, time frames, and psychological factors.
> Past performance doesn’t guarantee future results. Technical analysis helps only stack the odds in your favor and doesn’t guarantee profit. Therefore, you must conduct proper risk management.
The Chart art
Line Chart
Bar Chart
Candlestick Chart
The time factor
- Depending on the type of investor you are, you can choose different time frames to conduct technical analysis.
- For Example, If you’re a day trader and want to take advantage of the crypto markets’ fluctuations, you can study the market prices in the past 30 minutes, hour, or four hours.
The psychology factor: Trends
- As you study market movements, you may start finding patterns and prices that keep showing their faces on the chart. A lot of this repetition has to do with market psychology and the crowd’s general feeling about cryptocurrency.
Spotting the Key Levels
- A support level is a barrier that prevents the prices from going lower. It’s always below the current market price on your chart. Market participants who spot the support generally wait at that level to buy the cryptocurrency.
- One of the popular ways to spot a support level is to study the cryptocurrency’s past performance on the chart. If a price level keeps “supporting” the cryptocurrency’s value from dropping lower, you can mark it as a support level.
The support level becomes stronger the more it’s tested. But after strong support is broken, the market sentiment runs a good chance of shifting to bearish and starting to drop lower toward the next support levels.
Resistance Levels
- Resistance is a barrier that prevents prices from going higher. It must be above the current price on your chart, and you can use it as a point to sell your crypto assets.
- You can identify a resistance level with your naked eye by looking for peaks on the chart. Every peak can be considered a resistance level as long as it’s above the current market value.
- Prefer to use Fibonacci retracement levels to identify support and resistance levels. By applying Fibonacci to a past trend, you can immediately see a number of support and resistance levels without having to apply them one by one on your own. Of course, Fibonacci levels aren’t always completely accurate, and you may need to play around with your application a bit to get it right.
Trends and channels
- Trends can be formed based on market psychology. Some trends are very easy to spot. For example, the period between July and December 2017 was a period of an extreme uptrend in Bitcoin and many other cryptocurrencies when the prices just kept going up. Of course, this strong uptrend caught the attention of many people, investors or not, which led to the crypto bubble that came down crashing in 2018. But spotting trends isn’t always as easy.
- Drawing trend lines is an art. And just as with any other type of art, everyone has a unique opinion on them.
1. uptrend — Connect two or more bottoms
2. downtrend — Connect two or more peaks
- If the trend lines are above the current price, you can also consider them angled resistance levels. If the line is below the current price, you can use it as a support level.
- what if the market is moving between two parallel support and resistance levels? Technical chartists call this formation a channel.
You can use lengthy channels for short-term trading strategies
When the trend is no longer your friend
- Unfortunately, trends never continue forever. All good things must come to an end. What goes up must come down.
- Though key support and resistance levels can help you predict when a trend may end, you must back up your discoveries with fundamental and market sentiment analysis
Picking Out Patterns on a Chart
- Bullish reversal patterns
When a bullish reversal formation is confirmed, it normally indicates that the trend of the market price will reverse from a downtrend into an uptrend.
- Bearish reversal patterns
A bearish reversal formation is the exact opposite of a bullish one. With a bearish reversal, the prices normally hit a resistance during an uptrend and can’t go any higher.
Smoothing Charts Out with Moving Averages
- If you find price charts and all the information they contain too complicated, you’re not alone! Likeminded investors and chartists often turn to tools categorized as moving averages (MAs) to identify those trends more easily.
- There are Basic moving averages & Complex moving averages.
